The words “Insolvency” and “Bankruptcy” are generally used interchangeably in common parlance but there is a marked distinction between the two. Insolvency and Bankruptcy are not synonymous.
The term “Insolvency” notes the state of one whose assets are insufficient to pay his debts or his general inability to pay his debts. The tern “Insolvency” is used in a restricted sense to express the inability of a party to pay his debts as they become due in the ordinary course of business.
The term “Bankruptcy” the condition of insolvency. It is a legal status of a person or an entity who cannot repay debts to creditors. The Bankruptcy process begins with the filing of the petition in a court or before an appropriate authority designated for this purpose. The debtor’s assets are then evaluated and used to pay the creditors in accordance with Law.
The term Insolvency is used for individuals as well as organisation/corporate. If insolvency is not resolved, it leads to Bankruptcy in case of individual and liquidation in case of corporate.
Insolvency and Bankruptcy Law in various Countries
Insolvency Framework in the UNITED KINGDOM
The Insolvency Act, 1986 and the Insolvency Rules, 1986 regulate the Insolvency framework is the United Kingdom. The Insolvency Act, 1986 was enacted on the recommendation of the Cork Review Committee Report on Insolvency Law and Practice (1982). Prior to the enactment of the Insolvency Act, 1986, the law relating to Insolvency in the UK was fragmented and was contained in the Bankruptcy Act, 1914, the deeds of Arrangement Act, 1914, the Companies Act, 1948 and the parts of Country Code Act, 1959. They were supplemented by the principles of Common Law and equity.
The Act of 1986 consolidated all:
Enactments relating to Company Insolvency and Winding Up
Enactments relating to Insolvency and Bankruptcy of individuals, and
All other enactments bearing on these two subject matters, including the function and qualification of Insolvency practitioners, the public administration of Insolvency, the penalization and redress of malpractice and wrongdoing, and the avoidance of certain transactions at an undervalue.
The Insolvency Act, 1986 deals with the insolvency of individuals and companies and is divided into the following three groups.
Group I- deals with Company Insolvency
Group II- deals with Insolvency of Individuals and
Group III- deals with Miscellaneous matters bearing on both Company & Individual Insolvency
The Insolvency Act, 1986 introduced the following new procedures in order to explore the possibility of bringing a burdened company back to life as a viable entity. This measure in the UK Insolvency Act, 1986 represents an attempt to emulate the ‘rescue Culture’, a characteristic of the corporate sector in the US.
Company Voluntary Arrangements (CVAs)
Insolvency Framework in the USA
“Bankruptcy Code”, a federal law, governs bankruptcy in the United States of America. It is a uniform federal law that governs all bankruptcy cases in America. The Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act, 1978 and is codified as title 11 of the United States Code. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules).
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code.
Chapter 7 titled “liquidation”. In Chapter 7 Bankruptcy, a court-appointed trustee or administrator takes possession of non-exempt assets, liquidates these assets and then uses the proceeds to pay creditors.
Chapter 9 titled “Adjustment of Debts of a Municipality’. Chapter 9 Bankruptcy proceedings provide for reorganization which is available to municipalities. In Chapter 9 Bankruptcy proceedings a municipality (which includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) get protection from creditors and a municipality can pay back debt through a confirmed payment plan.
Chapter 11 titled “Reorganization”. Unlike Chapter 7 where the business ceases operations and a trustee sells all Chapter 11 the debtor remains in control of its business operations and repay creditors concurrently through a court-approved reorganization plan.
Chapter 12 was added to the Bankruptcy code, 1986. It allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debt.
Chapter 15 under this chapter a representative of a corporate bankruptcy proceeding outside the country can get access to the United States Courts.
Insolvency Framework in the INDIA
The Insolvency and Bankruptcy Code, 2016 – Introduction
The Insolvency and Bankruptcy Code Bill was drafted by a specially constituted ''Bankruptcy Law Reforms Committee'' (BLRC) under the Ministry of Finance. The Insolvency and Bankruptcy Code was introduced in the Lok Sabha on 21 December 2015 and was subsequently referred to a Joint Committee of Parliament. The Committee submitted its recommendations and the modified Code was passed by Lok Sabha on 5 May 2016. The Code was passed by Rajya Sabha on 11 May 2016 and it received the presidential assent on 28 May 2016.
The Insolvency and Bankruptcy Code, 2016 extends to the whole of India. However, Part Ill of the Code does not extend to the State of Jammu and Kashmir.
Section 1 of the Code provides that the Central Government may appoint different dates for different provisions of this Code and any reference in any such provision to the commencement of this Code shall be construed as a reference to the commencement of that provision.
The Insolvency and Bankruptcy Code, 2016 consolidates the existing framework by creating a single law for insolvency and bankruptcy. The Code applies to companies, partnerships, limited liability partnerships, individuals and any other body which the central government may specify.
Section 2 of the Insolvency and Bankruptcy Code, 2016 as amended vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 provides that the provisions of the Code shall apply to –
any company incorporated under the Companies Act, 2013 or under any previous company law,
any other company governed by any special Act for the time being in force,
any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008,
Such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf,
personal guarantors to corporate debtors,
Partnership firms and Proprietary Firms
Individuals other than a person referred to in clause (e)
In relation to their Insolvency, Liquidation, Voluntary Liquidation or Bankruptcy, as the case may be.
HOW CODE IS ORGANISED
The Insolvency and Bankruptcy Code, 2016 consists of a total of 255 sections organised in five Parts. Part II deals with insolvency resolution and liquidation for corporate persons whereas Part Ill lays down the procedure for insolvency resolution and bankruptcy for individuals and partnership firms. Part IV of the Code makes provisions for the regulation of Insolvency Professionals, Agencies and Information Utilities and Part V Includes provisions for miscellaneous matters. The Code also has eleven Schedules which amends various statutes.
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